Press Release of January 31, 2018
In important areas such as tax policy, education, and energy, the future grand coalition must be considerably more ambitious – The need for reform in Germany is not being addressed sufficiently
Germany’s next government will most likely once again be a grand coalition. However, the results of the preliminary coalition talks between the Union parties and the SPD, which serve as a basis for the current negotiations, do not sufficiently address Germany’s need for reform, as many scientists at the German Institute for Economic Research (DIW Berlin) have concluded. “Good approaches came from the talks, but as far as Europe, tax policy, education, investments, and other areas are concerned, vision and ambition are lacking,” said DIW President Marcel Fratzscher. “The actual coalition talks should do more than just endorse the agreement that has been reached; they should be used to improve many aspects of it as well. The German economy may be doing well, but the country is in urgent need of reforms. Now is the time to initiate these reforms before another four years are lost.”
DIW Berlin researchers had the following to say regarding various key areas:
Taxes: “Indirect taxes must be reduced in order to relieve low-income earners”
“Tax policy is one of the few fields where the Union parties and SPD strongly disagree. Accordingly, the results from the preliminary coalition talks in this area were less ambitious. A reduction of the solidarity tax is planned for 2020/21 to provide tax relief, which however will mainly benefit high-income earners. Indirect taxes need to be reduced to provide more relief to low- and middle-income earners. For example, VAT or social security contributions could be systematically reduced. However, the money to do so is lacking, as surpluses are used primarily for spending programs. Lower social security contributions provide moderate relief for workers, but returning to a parity of health insurance contributions burdens employers. Moreover, the Grand Coalition 3.0 lacks a clear vision to make public finances sustainable over the long term. As soon as the interest rate rises again, the surpluses will quickly decline,” said tax expert Stefan Bach, a research associate in the Public Economics department.
Pensions: “Without strengthening private financial precautions, the pension level cannot be credibly guaranteed”
“I see a need for improvement in multiple areas when it comes to pensions. The role of private pensions, above all for low earners, needs to be clarified. In order for this pillar to be able to appropriately play its role in securing provisions for old age, the current, voluntary private pension plans must be strengthened and potentially made mandatory. The pension level cannot be credibly guaranteed without redefining this key element. The suggestions for combating poverty among the elderly do not go far enough. The suggested basic pension creates a new form of social transfer with a considerable amount of bureaucratic effort for a small group of older people: only a few are likely to be eligible as well as able to prove the required 35 years of contributions. Instead, with less effort, the exemption rules can be expanded for basic benefits and the statutory pension strengthened specifically for low earners. Action needs to be taken in other areas as well in order to prevent poverty in old age in the long term. There need to be better opportunities while one is still employed,” said pension expert Johannes Geyer, a research associate in the Public Economics department.
Gender equality: “Joint taxation of married couples with full income splitting creates the wrong incentives and needs to be reformed”
“The paper resulting from the preliminary talks mentions reaching gender quality as a goal, but a central aspect—the tax system—is not taken into account. Joint taxation of married couples with full income splitting, above all in combination with mini-job rules, creates negative incentives for women to work more and longer hours and needs to be reformed. Individual taxation with a transferable basic tax-free amount would be a promising approach here. Another starting point to create more gender quality would be to strengthen the components for both partners when it comes to family benefits. For example, to extend paid paternal leave for the other partner,” said Katharina Wrohlich, a research associate in the Gender Studies research group.
Education and family: “Government participation and the quality of educational institutions need to be brought to the forefront”
“I am pleased that the members of the coalition want to strengthen families and create equal educational opportunities for all. However, the plan to increase child benefit payments is not productive: it’s too expensive and brings too little. The resolutions contain good approaches as well, such as the introduction of a right to full-day care at primary school. But here, just as with the expansion of early childhood education, quantity is not enough. The quality of the offers must be emphasized more. All in all, greater commitment from the federal government is required in this area, as well as in terms of financing and in the area of quality regulations so that Germany is no longer a patchwork in this regard. I do not recommend making pre-school childcare free of charge for all children. Rather, the federal government should establish regulations that make the fee scale more progressive nationwide. The cooperation ban, which prevents the federal government from influencing federal states’ education policies, should at least be relaxed in these areas,” said C. Katharina Spieß, director of the Education and Family department.
Energy: “The fossil-fuel phase-out needs to be initiated now and completed by 2030”
“Although the coalition parties are committed to climate goals and expanding renewable energies and want to gradually initiate the fossil-fuel phase-out, their commitments to energy policy are too ineffectual. I miss incentives for a targeted expansion of renewables, including optimized load management and decentralized smart grids as well as additional storage. Moreover, I think the agreements on the fossil-fuel phase out are moving too slowly. The phase-out must be initiated now and completed by 2030. Energy-saving measures should be sped up and the transition to sustainable transportation, including a quota for e-mobility and an increase of the diesel tax, should be carried out,” said Claudia Kemfert, head of the Energy, Transportation, Environment department.
Digitalization: “Cleverly designed regulatory frameworks instead of state funding at all costs”
“In terms of digitalization, the results from the talks are brimming with good approaches, from expanding infrastructure to fully digitizing administration. The goal of expanding gigabit networks nationwide by the year 2025 is certainly important, but too general. Investments should only be made where future economic benefits exceed costs. According to results of the preliminary talks, subsidies for grid expansions will also be linked to fiber optic technology, which violates the principle of technology neutrality. This does not ensure that the best solution prevails. Moreover, generally speaking, government subsidies lead to windfall profits and thus to costs that could be avoided in cleverly designed regulatory frameworks. The vision of a state 4.0 is appealing, but unfortunately, there is no concrete plan on how to get there. In particular, the competencies between the government and municipalities are not clearly defined,” said Tomaso Duso, head of the Firms and Markets department.
Investments: "Lack of investments in the industry and in the municipalities need to be addressed"
“For years, Germany has suffered from a pronounced lack of investments. The coalition has not come up with much to address this issue. An investment-oriented corporate tax reform could provide an important impetus for private investments: companies that invest in Germany would pay fewer taxes than those who did not invest. This can be implemented by changing the depreciation rules. This way, incentives would be created for the industry to invest in the future of Germany as a production location. The lack of investments in the municipalities could be counteracted by the introduction of a joint “local investments” program. Similar to the existing joint program for improving regional economic structures, federal and state governments could initiate targeted investment projects in sluggish communities in accordance with the constitution,” said Martin Gornig, research director for industrial policy.
Housing: “Property tax reform would make more land available for building and ease the housing market crisis”
“The challenges in the housing market will not lessen for the next federal government—on the contrary, rents in metropolitan areas and many large cities are still rising sharply, as housing is becoming increasingly scarce. Our latest forecast shows that the housing market’s construction boom will come to an end in the next few years, which is likely to exacerbate the situation. It is not enough to want to counter the resulting rising rents with just rent control. At best, politicians can use rent control to buy time to get to the root of the problem. Solving this issue includes improving the basic conditions for an increased number of new housing developments. Above all, municipalities are needed to identify more land as building land and to put inactive land to use. Possible leverage for this would be a well-conceived property tax reform: if a hypothetical land value, calculated from the possible income from a development, were taxed instead of a building value, it would very likely motivate investors to not leave their land unused and open it up for construction. In addition, focus must be increasingly directed to already developed land, where you could expand existing buildings or build backyards. A new federal government could support this with a grant program to strengthen the equity of investors,” said real estate economist Claus Michelsen, a research associate in the Forecasting and Economic Policy Department.
Europe: “The new federal government must quickly take the initiative for a comprehensive European reform”
“The results from the preliminary coalition talks make Europe a high priority. That’s an encouraging sign, but it has to be more than just lip service. Immediately once the government has been formed, Berlin must reach out to Paris and actively and constructively engage in reforming the euro area and the EU. The reforms must meet both the desire of many member countries for more risk sharing and the German aspirations for more market discipline. It is high time for taking action: Europe’s economy is still fragile and the monetary union vulnerable to crises. Proposals for a comprehensive reform are on the table, including a new spending rule that would replace the Maastricht Criteria. It is important during the reform process that the federal government does not treat its partners in its usual school-masterly and condescending fashion,” said DIW President Marcel Fratzscher.